Facebook: Wait For Stock To Sink Below $20, Analyst Advises

Bernstein Research analyst Carlos Kirjner has lifted his rating on Facebook shares to Market Perform from Underperform, while trimming his target on the social network to $23, from $25. The analyst suggest potential investors in the stock might want to wait until the stock sinks below $20.

"We believe that Facebook is worth $19/share (10 times estimated 2014 EBITDA plus cash) valued just as a display advertising business gaining market share due to its fundamental competitive advantages based on scale, user data and identity," he writes in a research note. "These $19/share do not assume upside from its social advertising capabilities and do not give Facebook any credit for upside from yet-to-be-defined businesses based on its distinctive assets, such as its social graph. Because these 'upside' opportunities are still highly uncertain, we value them at $4/share based on our sizing of such upside opportunities and our judgment of the probabilities they will come through, leading us to our $23/share valuation."

That said, he has some concerns about the company's advertising business. "The decline in European CPMs [in the June quarter], attributed by management to poor macro environment, suggests that Internet advertisers in Europe are not yet convinced of Facebook's high ROI," he writes. "The fact that Facebook's revenue trajectory and key metrics are already affected this heavily and this early by external drivers such as seasonality and macro give us pause. To us, this suggests that either the ROI on Facebook advertising is just not that attractive, or the company has a long and arduous path to making it transparent to advertisers."

He notes that Google reported accelerating revenue performance in Europe, driven by the UK, despite macro headwinds in Southern Europe. "One could conclude from Google's results that online advertising that offers 'transparent,' high ROI to advertisers was somewhat immune to the macro headwinds in Europe, and Facebook was not," he writes.

Not least, he warns that the coming Facebook insider lock-up expiration could be trouble for the stock.

"As it has been well known, over 211 million shares will be added to Facebook's current float of 484 million shares in August, an increase of nearly 40%, up to 355 million shares will be added to the float in October (an 73% increase versus the current float), and 1,339 million in November (an 276% increase compared to the current float)," he writes. "While these are well known facts and should (in theory) be already reflected in the stock price, history suggests that there is a good chance of transient pressure on the stock price as liquidity increases abruptly. We would see a buying opportunity if FB were to trade around or below $19/share."

FB today is down 26 cents, or 1.1%, to $22.89; the stock is now down nearly 40% from its $38 IPO price.